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How does a 401(k) or 403(b) work?

How does a 401(k) or 403(b) work?

A 401(k) or 403(b) is an employer-sponsored retirement savings plan designed to help you save for retirement through automatic payroll deductions.

Contributions
Your contributions are automatically deducted from your paycheck each pay period. You can typically choose to contribute:

  • A percentage of your salary, or
  • A fixed dollar amount per paycheck

Contribution types include:

  • Pre-tax contributions, which are deducted before taxes are applied and may lower your current taxable income
  • Roth contributions, which are deducted after taxes but may allow for tax-free withdrawals in retirement, if certain conditions are met

Investing your contributions
Once contributions are deposited into your retirement plan account, the money is invested according to the investment option(s) you select. If you do not make an investment election, your contributions will be invested in the plan’s default investment option.

Employer contributions
Many employers choose to match a portion of the money you contribute to your retirement plan, which can help your savings grow faster. Employer matching contributions are not required and vary by plan.

Accessing your money
Retirement plans have rules around withdrawals:

  • In most cases, you cannot withdraw funds without penalty until you reach age 59½
  • Withdrawals taken before age 59½ may be subject to taxes and early withdrawal penalties
  • Some plans may allow loans or hardship withdrawals, subject to plan rules and IRS guidelines

Need more information?
For specific details about your plan, including contribution limits, investment options, or withdrawal rules, contact your Recordkeeper or reach out to the SMARTMap team at (888) 736-4015 for assistance.